1. An Option Theoretic Model for Ultimate Loss-Given-Default with Systematic Recovery Risk and Stochastic Returns on Defaulted Debt Michael Jacobs, Ph.D., CFA Senior Financial Economist Credit Risk Analysis Division Office of the Comptroller of the Currency October, 2010 The views expressed herein are those of the author and do not necessarily represent the views of the Office of the Comptroller of the Currency or the Department of the Treasury.
LGD @ default approach does not address the discount ate question – “implicit discounting”
Broad definition of default (“quasi-Basel” according to Moody’s) Exceptions: trade payables & other off-balance sheet obligations debt type, seniority ranking, debt above / below, collateral type Obligor / Capital Structure: industry, proportion bank / secured debt, number of creditor classes / number instruments Defaults: amounts (EAD, AI), default type, coupon, dates / durations Recovery / LGD measures: prices of pre-petition (or received in settlement) instruments at emergence or restructuring Sub-set: prices of traded debt at around default (30-45 day avg.)
Many OC’s had restructuring dates very near or after default trading dates